Price discrimination through online couponing: Impact on likelihood of purchase and profitability

Oliver and Shor [2003, Digital redemption of coupons: Satisfying and dissatisfying effects of promotion codes. Journal of Product and Brand Management 12(2), 121–134] provide data suggesting that Web sites prompting customers to enter a “promotion code”, a digital version of the coupon, may unwittingly be losing customers who otherwise would be willing to purchase. They suggest that the act of requesting such a code hints at the existence of price promotions that may be unavailable to the current shopper, potentially diminishing one’s likelihood of purchase. We extend their experiment to address the issue of price discrimination and profitability in this context. Our results demonstrate that this diminished likelihood of purchase has adverse effects on profitability and offsets any gains from market segmentation. Further, we analyze a firm’s ability to deliver coupons to targeted market segments successfully, given the availability of such coupons on multiple Web sites outside of the retailer’s control. We observe that the existence of coupon repositories distorts efficient price discrimination, leading to segmentation of consumers not along dimensions of price sensitivity but of technical competence. These results have managerial implications for those considering online couponing policies.